Are NFTs the next big investment?15/09/2022
Forget designer handbags, expensive cars and fine wines, because the latest investment must-have is something which only exists in the digital sphere.
NFTs are all over the news at the moment, whether it’s a story about Twitter founder Jack Dorsey selling an NFT of his first tweet for just under $3 million, celebrities launching their own NFTs or Instagram hacks stealing assets worth millions of pounds.
With reports that the NFT market is set to grow by more than £120bn over the next four years, it’s an industry that looks like it’s around to stay.
But what makes an NFT so special and is it worth the investment? First, let’s look at the basics.
What is an NFT?
NFT stands for non-fungible token – a digital asset which acts as a stand-in for a real object – and, in simple terms, non-fungible means it is unique and cannot be replaced.
This is because each NFT includes a distinctive identifier and metadata, setting it apart from other cryptocurrencies like bitcoin.
For example, if you trade a bitcoin for another bitcoin you end up with the same product, like for like. However, each NFT is one of a kind and, for this reason, they are becoming a popular method for buying and selling digital artwork, among other things.
NFTs and the blockchain
A blockchain is a distributed public ledger which stores information electronically in digital format.
What makes the blockchain database stand out in that it stores information in blocks which, when filled, are closed and attached to the previous blocks in the chain.
This creates an irrefutable timeline of data, which is timestamped and can be referred back to, but not edited.
This plays an important role in the exchange of NFTs as it makes it easy to verify validity and ownership by creating a trail all the way back to the source.
NFTs and intellectual property protection
Someone could be forgiven for thinking that if they’re buying an NFT, then they’re also buying the intellectual property rights in the asset associated with it.
However, this is not necessarily the case and many NFTs do not contain any rights in the underlying proprietary rights to the underlying asset.
In the absence of any other terms, buying an NFT will simply confer the owner with rights in that cryptographic token that represents provable ownership rights in a unique digital asset.
An analogous example would be when an individual buys a limited edition print of a painting.
The buyer would own the physical print itself but would not generally own any proprietary rights in the original painting.
As a consequence, they would not enjoy any wider exploitation rights, such as the rights to create merchandise based on that painting or licence further reproductions.
If an NFT seller is also the owner of the intellectual property rights in the underlying asset, then it would be open for that seller transfer to those intellectual property rights to the buyer.
However, this transfer of intellectual property rights will not happen automatically as a consequence of buying the NFT; the rights will only transfer if there are express terms in writing assigning the intellectual property rights (either in a smart contract or other form of agreement).
What are the legal implications?
From the investor’s perspective, it is important to seek clarity from the seller as to what rights are being “sold” with the NFT.
This will involve undertaking due diligence to determine the assets being transferred with the NFT.
Seeking this clarity will ensure that the investor acquires the rights intended and does not open itself up to risk of claims from third parties for intellectual property infringement. .
Equally, businesses offering NFTs for investment will benefit from having a clear position on the assets being sold and will avoid potential claims from purchasers alleging misrepresentation of the rights on offer.
Sellers should also consider assessing whether selling the NFT could constitute a regulated activity for the purposes of financial regulation.
Although NFTs are not specifically regulated, they can fall within the scope of legal regulation if they display characteristics of other regulated investment units.
Are NFTs a safe investment?
Like all investments, there are pros and cons.
NFTs are accessible to everyone and can be traded with people anywhere in the world and the existence of the blockchain makes an investor’s ownership more transparent and secure.
There are also options for fractional buying, where multiple people share ownership of an asset.
On the other hand, NFTs are still relatively new and not widely understood, so the market for buying and selling them is smaller than with other investments.
NFT generation is highly energy-intensive and a single NFT transaction can take as much electricity as it would take to a power a home for 36 hours, so there are lots of concerns about the effects of the NFT marketplace on the environment.
NFTs are also at risk of theft if the owner’s private key (like a PIN for an NFT wallet) is compromised and cannot be regained.
As highlighted above, there are various legal considerations that need to be considered so thorough due diligence is always recommended.
NFTs present both opportunities and risks for investment in equal measure.
Whether a buyer is considering investing in NFTs or offering them for investment, we would recommend they fully research all of the risks involved to ensure that any investment activities don’t fall foul of the law.